by Scott Moritz
Managing Director – Leader, Protiviti’s Investigations and Fraud Risk Management Practice
In recognition of the Association of Certified Fraud Examiners and International Fraud Awareness Week, Protiviti, whose practitioners include over 100 members of the ACFE, is releasing a series of tips on fraud awareness to assist the ACFE in communicating the many ways that fraud can affect your organization. We also suggest proactive steps you can take to better position you and your organization in the ongoing fight against fraud.
Having just completed my holiday gift list – a list that is free from foreign officials, I should point out – I thought it would be useful to discuss the various ways in which gifts, entertainment, favors and charitable giving can lead to some pretty negative outcomes.
The key is knowing the individuals to whom we are providing these items of value: Are any of them in positions of influence to award business to your organization? Are they government officials or employees of state-owned companies? Are these individuals connected in any way with charities to which we are donating?
Generally speaking, it is acceptable to give gifts to customers and prospects, entertain them, extend certain professional courtesies to them, and consider support for their favorite causes. What’s key, though, is ensuring these important social norms are not distorted into thinly disguised bribes given in an effort to obtain some type of unfair business advantage.
Several things are critically important to work out in advance to ensure that items of value and charitable donations pass the reasonableness test. First and foremost, your organization’s policies and procedures need to provide clear guidance, limits and preapproval requirements surrounding gift-giving, entertainment, defining other things of value (a category into which favors would fit), and charitable donations. Those policies and procedures should not only provide guidance and examples of appropriate and inappropriate gifts, entertainment, other items of value, and charitable donations, but they also should require that certain categories of recipient be subject to heightened approvals and, in some instances, prior approval before the value is exchanged.
For example, clients before whom there is a pending proposal in response to a formal RFP, as well as any client or contact that is a government official or employee of a state-owned company, may warrant a pre-approval such that a second set of eyes can evaluate the compliance risk objectively and any appearance of impropriety with regard to the proposed gift or other item of value. Those pre-approvals should not only take place, but both the request and the approval (or rejection) should be formally documented.
Even if the decision-making and associated documentation are found to be incorrect by a regulatory body or law enforcement agency, it would be difficult for the agency to assert that the company didn’t have controls and place and that the transaction was not transparent.
Another critical success factor in limiting compliance risk in this area is whether the company has a formal mechanism to determine whether recipients of gifts or any items of value are governments, government-owned and/or legitimate charities free from conflicts. Equally important is to have complete transparency with regard to the identity of each gift recipient. This last point may seem obvious, but often in marketing promotions or holiday gift giving, blocks of gifts, gift cards, tickets to sporting events or other items are given to distributors, sales agents or other intermediaries, and the company risks losing sight of who the ultimate recipients are.
Amazingly, charitable giving and political donations have also been abused and distorted to disguise bribes or kickbacks to government officials as legitimate philanthropy or efforts to be a good corporate citizen by supporting local charities. Like the other areas described above, it is important to understand how the charitable donation or political contribution was first solicited and by whom. It is equally important to be able to demonstrate a good understanding of the purpose of these donation or contributions, the charities and political organizations themselves, along with some degree of negative assurance that these organizations are free from conflicts of interest. It is a sound business practice to have a policy that governs such giving to include a requirement that all financial support require written pre-approval.
The bottom line here is that generosity, relationship management, and political and social consciousness require more than just financial support. They require strong policies and procedures, along with a keen awareness of the potential risks and controls to provide reasonable assurance that all of the company’s activities in these categories are reasonable and are well aligned with your policies, procedures, and local laws and regulations.